United Health Products, Inc. - Quarter Report: 2023 June (Form 10-Q)

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2023

For the transition period from ____________ to ____________

Commission file number: 000-27781

(475) 755-1005

(Company’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12 (b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit such file). Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☒

The number of shares issued and outstanding of the Registrant’s Common Stock, as of August 9, 2023 was 241,123,222.

UNITED HEALTH PRODUCTS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

    UNITED HEALTH PRODUCTS, INC.

Condensed Balance Sheets

See notes to unaudited condensed financial statements.

UNITED HEALTH PRODUCTS, INC.

Condensed Statements of Operations

(Unaudited)

See notes to unaudited condensed financial statements.

UNITED HEALTH PRODUCTS, INC

Condensed Statement of Stockholders’ Deficiency

Three and Six Months Ended June 30, 2023 and June 30, 2022

(Unaudited)

See notes to unaudited condensed financial statements.

 UNITED HEALTH PRODUCTS, INC.

Condensed Statements of Cash Flows

(Unaudited)

See notes to unaudited condensed financial statements.

UNITED HEALTH PRODUCTS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED JUNE 30, 2023 AND 2022

(Unaudited)

Note 1. Organization and Basis of Preparation

United Health Products, Inc. (the “Company”) develops, manufactures, and markets a patented hemostatic gauze for the healthcare and wound care sectors. Our gauze product, HemoStyp®, is a neutralized, oxidized, regenerated cellulose derived from cotton and designed to absorb exudate/drainage from superficial wounds and help control bleeding. The Company in the process of seeking regulatory approval to sell our HemoStyp product line into the U.S. Class III and European Union CE Mark surgical markets. 

The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 28, 2023.

In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period, have been included.

Note 2. Significant Accounting Policies

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred recurring net losses, negative working capital and operations have not provided cash flows. Additionally, the Company does not currently have sufficient revenue producing operations to cover its operating expenses and meet its current obligations. In view of these matters, there is substantial doubt about the Company’s ability to continue as a going concern. The Company intends to finance its future development activities and its working capital needs largely from the sale of equity securities with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Cash and Cash Equivalents

The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets, as well as in the healthcare industry, and any other parameters used in determining these estimates, could cause actual results to differ.

Fair Value Measurements

Accounting principles generally accepted in the United States define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1. We value assets and liabilities included in this level using dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2023 and 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.

 Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of its HemoStyp product by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.

The Company receives orders for its HemoStyp products directly from its customers. Revenues are recognized based on the agreed upon sales or transaction price with the customer when control of the promised goods are transferred to the customer. The transfer of goods to the customer and satisfaction of the Company’s performance obligation will occur either at the time when products are shipped or when the products arrive and are received by the customer. No discounts are currently offered by the Company. The Company does not provide an estimate for returns as there is no anticipation for any returns in the normal course of business.

Trade Accounts Receivable and Concentration Risk

We record accounts receivable at the invoiced amount and we do not charge interest. We review the accounts receivable by amounts due from customers that are past due, to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We will also maintain a sales allowance to reserve for potential credits issued to customers. We will determine the amount of the reserve based on historical credit issued.

There were no provisions for doubtful accounts recorded at June 30, 2023 and December 31, 2022. The Company recorded $0 in bad debt expense for the three and six month periods ended June 30, 2023 and 2022.

Inventory

Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventory on the balance sheet consists of work-in process.

During the six months ended June 30, 2023 and 2022, the Company determined that $0 needed to be impaired and written-off.  During the six months ended June 30, 2023, the Company used $1,132 of inventory as samples for its FDA testing and recorded it to research and development on the Statement of Operations.

Stock Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation expense for employees and non-employees is measured at the grant date fair value. Stock-based compensation for all stock-based awards to employees and directors is recognized as an expense over the requisite service period, which is generally the vesting period.

Per Share Information

Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. The dilutive effect of potential common shares is not reflected in diluted earnings per share because the Company incurred net losses for the three and six months ended June 30, 2023 and 2022 and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive.

The total potential common shares as of June 30, 2023 included 47,665,000 of restricted stock units, 3,552,376 shares for convertible notes payable – related parties and 1,406,300 shares for convertible notes payable. The total potential common shares as of June 30, 2022 included 30,915,000 of restricted stock units.

Patents

Patents are stated on the balance sheet at cost. Costs, such as filing fees with patent granting agencies and legal fees directly relating to those filings, incurred to file patent applications were capitalized when the Company believed that there was a high likelihood that the patent would be issued and there would be future economic benefit associated with the patent. These costs were amortized from the date of the patent application on a straight-line basis over the estimated useful life of 10 years. All costs associated with any abandoned patent applications are expensed.

Accumulated amortization as of June 30, 2023 and December 31, 2022 was $6,075 and $4,050, respectively. Amortization expense for the six months ended June 30, 2023 and 2022 was $2,025, respectively.

Future Amortization Expense

Impairment of Long-lived Assets

The Company applies the provisions of ASC 360, Property, Plant and Equipment, where applicable to all long-lived assets. ASC 360 addresses accounting and reporting for impairment and disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

When long-lived assets are sold or retired, the related cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the results of operations. During the six months ended June 30, 2023 and 2022, the Company determined no impairment was required.

Deferred Offering Costs

Deferred offering costs represent specific incremental costs directly attributable to the offering of securities. The deferred offering costs are recorded as an offset to additional paid-in capital and charged against the proceeds received.

Advertising and Marketing Costs

                Advertising and marketing expenses are expensed as incurred. The Company incurred $57,536 and $55,000 in advertising and marketing costs during the six months ended June 30, 2023 and 2022, respectively. 

Research and Development

                The Company charges research and development costs to expense when incurred. The Company incurred $323,789 and $199,966 in research and development expenses during the six months ended June 30, 2023 and 2022, respectively.

Leases

The Company follows the provisions of ASC 842, and records right-of-use ("ROU") assets and lease obligations for its operating leases, which are initially recognized based on the discounted future lease payments over the term of the lease. If the rate implicit in the Company's leases is not readily determinable, the Company's applicable incremental borrowing rate is used in calculating the present value of the sum of the lease payments.

The lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company has elected not to recognize ROU asset and lease obligations for its short-term leases, which are defined as leases with an initial term of 12 months or less.

New Accounting Pronouncements

The Company considers all new pronouncements and management has determined that there have been no recently adopted or issued accounting standards that had or will have a material impact on its financial statements.

Note 3. Related Party Transactions

Convertible notes payable - related parties

During the year ended December 31, 2022, Brian Thom, the Company’s Chief Executive Officer, converted $372,000 of a loan payable balance to a convertible note payable.  The unpaid accrued interest on the loan payable was transferred to the convertible note payable. The note has an interest rate of 10%, an original issue discount (“OID”) of 7% and has a maturity date of December 31, 2023. The note is convertible into common stock of the Company at $0.35 per share.  In the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.35 per share, the conversion price shall be reduced to equal such lower issue price per share.  The Company recorded $28,000 of a debt discount related to the OID. As of June 30, 2023 and December 31, 2022, the remaining unamortized debt discount was $7,578 and $16,998, respectively.  Accrued interest associated with the note was $55,592 and $33,897 as of June 30, 2023 and December 31, 2022, respectively.

During the year ended December 31, 2022, Robert Denser, a Director of the Company, loaned the Company $93,000 through a convertible note.  The note has an interest rate of 10%, an OID of 7% and has a maturity date of December 31, 2023. The note is convertible into common stock of the Company at $0.35 per share.  In the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.35 per share, the conversion price shall be reduced to equal such lower issue price per share. The Company recorded $7,000 of a debt discount related to the OID. As of June 30, 2023 and December 31, 2022, the remaining unamortized debt discount was $2,201 and $4,671, respectively. Accrued interest associated with the note was $9,236 and $4,034 as of June 30, 2023 and December 31, 2022, respectively.

Interest expense – related party on the above convertible notes payable was $19,426 (including $5,978 of debt discount amortization related to the OID) and $0 during the three months ended June 30, 2023 and 2022, respectively. Interest expense was $38,786 (including $11,890 of debt discount amortization related to the OID) and $0 during the six months ended June 30, 2023 and 2022, respectively. Accrued interest – related party due to these convertible notes was $64,828 and $37,931, as of June 30, 2023 and December 31, 2022, respectively.

Loans payable – related parties

During the year ended December 31, 2022, Kristofer Heaton, the Principal Financial Officer, loaned the Company $4,000 to pay for operating expenses. As of June 30, 2023 and December 31, 2022, $4,000 in principal was owed on the loan payable. The loan has an interest rate of 10% and is due on demand.

Interest expense – related party on the above loans was $106 and $0 during the three months ended June 30, 2023 and 2022, respectively. Interest expense was $212 and $0 during the six months ended June 30, 2023 and 2022, respectively. Accrued interest – related party as of June 30, 2023 and December 31, 2022 was $436 and $224, respectively.

Accrued liabilities – related parties

As of June 30, 2023 and December 31, 2022, $108,776 and $127,500 of accrued compensation and reimbursable expenses was due to the Company’s officers and management, respectively.

Equity transactions

During the six months ended June 30, 2023, the Company issued 1,204,688 shares of common stock with a fair value of $271,031 to its officers and management for $218,250 of accrued compensation (see Note 6).

Note 4. Promissory Note Payable

During the year ended December 31, 2022, the Company had entered into a $100,000 promissory note and had a principal balance of $9,136 and accrued interest of $0 as of December 31, 2022. The note accrued interest at 1% and requires monthly payments of $9,136 until the balance was paid in full.

During the six months ended June 30, 2023, the Company paid the remaining principal balance of $9,136.  As of June 30, 2023, the principal balance and accrued interest was $0.

During the six months ended June 30, 2023, $10,000 of accounts payable and accrued liabilities were paid on behalf of the Company.   The Company entered into a note payable for the $10,000 payment.  The note payable has an interest rate of 5% and has a maturity date of December 31, 2023.

Interest expense on the above loans was $125 and $0 during the three months ended June 30, 2023 and 2022, respectively. Interest expense was $250 and $0 during the six months ended June 30, 2023 and 2022, respectively. Accrued interest as of June 30, 2023 and December 31, 2022 was $250 and $0, respectively.

Note 5. Convertible Notes

During the year ended December 31, 2022, the Company issued a $93,000 convertible note and a $99,975 convertible note and received total proceeds of $192,975.  The notes have an interest rate of 10%, an OID of 7% and have a maturity date of December 31, 2023. The notes are convertible into common stock of the Company at $0.35 per share.  In the event the Company issues any shares of common stock before the maturity date at a price that is lower than $0.35 per share, the conversion price shall be reduced to equal such lower issue price per share. The Company recorded $14,525 of a debt discount related to the OID. As of June 30, 2023 and December 31, 2022, the remaining unamortized debt discount was $5,565 and $11,323, respectively.

Interest expense on the above convertible notes payable was $8,204 (including $2,895 of debt discount amortization related to the OID) and $0 during the three months ended June 30, 2023 and 2022, respectively.  Interest expense was $16,406 (including $5,758 of debt discount amortization related to the OID) and $0 during the six months ended June 30, 2023 and 2022, respectively. Accrued interest as of June 30, 2023 and December 31, 2022 was $16,102 and $5,454, respectively, and has been recorded in accrued liabilities on the balance sheet. 

Note 6. Issuances of Securities

Share issuances 2022

During the six months ended June 30, 2022, the Company had the following common stock transactions:

Share issuances 2023

                During the six months ended June 30, 2023, the Company had the following common stock transactions:

Restricted stock units

As of June 30, 2023 and December, 31, 2022, the Company has granted a total of 47,665,000 restricted stock units (RSU).  The RSU’s are subject to certain conditions and shall vest upon the achievement of certain Company objectives and milestones. 

Management is unable to predict if or when a Covered Transaction or Triggering Event under the RSU Agreements governing the restricted stock units will occur and as of June 30, 2023, there was $25,313,630 of unrecognized compensation cost related to unvested restricted stock unit awards.  

Activity related to our restricted stock units during the three months ended June 30, 2023 was as follows:

 Note 7. Accrued Litigation Settlement

On June 15, 2022, the Security and Exchange Commission’s (SEC) investigation of the Company, initially reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, was settled through the filing of a consent judgment without the Company admitting or denying the SEC’s allegations. As part of the settlement, the Company is required to pay a civil penalty of $450,000, payable in four installments as follows:

The Company has made total payments of $300,000 towards the civil penalty through June 30, 2023.  As of June 30, 2023 and December 31, 2022, the remaining balance was $150,000 and $300,000, respectively. The Company and the SEC have agreed upon an amended schedule of payments for the remaining balance owed under the settlement (see Note 10).

Note 8. Litigation

Effective as of March 31, 2023, a 2018 lawsuit filed by Philip Forman, against the Company and its former CEO relating to the validity of a June 25, 2015 Amendment to his November 10, 2014 Employment Agreement with the Company and claims for compensation on termination of his employment was settled. In the settlement, as full and complete consideration, the Company issued to Mr. Forman 1,850,000 shares of common stock of the Company with a fair value of $462,500.  

Note 9. Leases

In May 2023, the Company entered into 36-month operating lease, which provides for approximately 1,800 square feet of office space, that commenced on June 1, 2023 and ends on May 31, 2026. The lease required a $2,850 security deposit and monthly lease payments are $2,850 the first year of the lease, $2,964 the second year and $3,082 the third year.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. On the commencement date of the lease, the Company recorded $92,425 related to the ROU asset and lease liability.

The components of lease expense and supplemental cash flow information related to the lease for the period are as follows:

The supplemental balance sheet information related to leases for the period is as follows:

Maturities of the Company’s undiscounted lease liabilities are as follows:

Note 10. Subsequent Events

The Company has evaluated events from June 30, 2023, through the date whereupon the financial statements were issued and has determined that there are no material events that need to be disclosed except as follows:

The Company has proposed an amended installment payment plan to the SEC related to its civil penalty (see Note 7).  The proposed payment plan calls for the Company to make three $50,000 payments with payments due on August 1, 2023, September 1, 2023 and October 1, 2023 with any remaining principal plus outstanding post-judgement interest to be paid on November 1, 2023.  The $50,000 due on August 1, 2023 was paid by the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed financial statements and related notes appearing elsewhere in this quarterly report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under ‘Risk Factors’ in our annual report on Form 10-K for the fiscal year ended December 31, 2022, filed with SEC on March 28, 2023.

Company Overview

UHP develops, manufactures, and markets a patented hemostatic gauze for the healthcare and wound care sectors. Our gauze product, HemoStyp, is derived from cotton and designed to absorb exudate/drainage from superficial wounds and help control bleeding. We are in the process of seeking regulatory approval to sell our Hemostyp product line into the U.S. Class III and European CE Mark surgical markets.

Our HemoStyp Gauze Products

HemoStyp hemostatic gauze is a natural substance created from chemically treated cellulose derived from cotton. It is an effective hemostatic agent registered with the FDA for superficial use under a 510(k) approval obtained in 2012 to help control bleeding from open wounds and body cavities. The HemoStyp hemostatic material contains no chemical additives, thrombin, collagen or animal-derived products, and is hypoallergenic. When the product comes in contact with blood it expands slightly and quickly converts to a translucent gel that subsequently breaks down into glucose and salts. Because of its benign impact on body tissue and the fact that it degrades to non-toxic end products, HemoStyp does not impede the healing of body tissue as compared to certain competing hemostatic products. Laboratory testing has shown HemoStyp to be 100% absorbable in the human body within 24 hours, compared to days or weeks with competing organic regenerated cellulose products. A human trial conducted in 2019 and 2020 demonstrated the effectiveness of HemoStyp in vascular, thoracic and abdominal surgical procedures.

HemoStyp hemostatic gauze is a flexible, silk-like material that is applied by placing the gauze onto the bleeding tissue. The supple material can be easily folded and manipulated as needed to fit the size of the wound or incision. In surface bleeding and surgical situations, the product quickly converts to a translucent gel that allows the physician or surgeon to monitor the coagulation process. The gel maintains a neutral pH level which avoids damaging the surrounding tissue. In superficial bleeding situations, HemoStyp can be bonded to an adhesive plastic bandage or integrated into a traditional gauze component to address a broad range of needs, including traumatic bleeding injuries and prolonged bleeding following hemodialysis.

Potential Target Markets

Our HemoStyp material is currently cut to several sizes and configuration and marketed as HemoStyp Gauze. While we have paused our commercial activities to focus on our Class III PMA application, our potential customer base includes, without limitation, the following:

Primary Strategy

Our HemoStyp technology received an FDA 510(k) approval in 2012 for use in external or superficial bleeding situations and we believe there is an opportunity for HemoStyp products to address unmet needs in several medical applications that represent attractive commercial opportunities. However, the Class III surgical markets, both domestic and international, represent the most attractive market for our products due to the smaller number of competitors offering Class III approved hemostatic agents and the resulting premium pricing for products that can meet the demanding requirements of the human surgical environment. We believe that our extensive laboratory testing and our completed human trial indicate that the HemoStyp technology could successfully compete against established Class III market participants, and could gain a significant market share. There can be no assurance that an FDA Premarket Approval (PMA) will be granted. 

In 2018, we made the decision to focus our efforts and resources on accessing these Class III markets to maximize the value potential of our HemoStyp products. The Class III PMA process required a substantial investment of time and resources so we made the strategic determination to deemphasize our sales and marketing to non-Class III markets in order to devote our full resources to the PMA process.

In anticipation of receiving a Class III PMA (which cannot be assured), we are evaluating paths to rapidly grow our revenue and profits in all potential market segments, with the objective of maximizing shareholder value. We do not intend to pursue the full commercialization of our products independently nor to remain an independent company in the long term. Options under consideration include (i) a sale or merger of the Company with an industry leader in the wound care and surgical device sectors, which may include a pre-sale collaboration on commercialization and distribution and (ii) one or more commercial partnerships with established market participants, without any specific, associated sale or merger transaction. 

The Company has been contacted by several medical technology companies that are active in the surgical equipment and hemostatic products sectors, and who have expressed an interest in the Company’s products and business strategy. In response to these inbound contacts, we continue to engage in discussions to evaluate the potential commercial partnerships in anticipation of an FDA decision on our Class III PMA application. There can be no assurances that any specific transaction will occur as a result of these discussions. No assurances can be given that the Company will identify any commercialization candidate(s) or complete a transaction.

Manufacturing and Packaging of our Products

The Company’s products will be manufactured to our specifications through a contract manufacturing arrangement with an FDA certified supplier that maintains stringent quality control protocols to assure the uniformity and quality of all of our gauze products. Information on the manufacturing process and our manufacturer’s facility has been submitted as part of our PMA submission. Our gauze products are cut to size, packaged and sterilized by service providers in the United States. 

Patents and Trademarks

Our  hemostatic gauze technology is protected through patents granted by the U.S. Patent and Trademark Office, which protection currently runs through 2029. In 2020 and 2021, we filed additional U.S. and International patents that protect the use of our NORC technology in a gel or hydrocolloid formulation.

On January 21, 2021, the U.S. Patent Office provided notification of publication of the Company’s patent application for the method of forming and using a hemostatic hydrocolloid. This publication does not imply any assurance of the receipt of the patent but establishes an obligation of any party that seeks to use the applicable method to pay royalties for the right to do so. The patent application for this process remains pending as of the date of this filing.

On February 11, 2021, the Company was notified that its application to establish global patent protection for the process of creating and deploying a hydrocolloid (or gel) format of its HemoStyp technology was accepted for publication under the procedures of the Patent Cooperation Treaty (“PCT”), an international patent law treaty which provides a unified procedure for filing a patent application in most foreign countries. We previously filed provisional patent applications for our HemoStyp hydrocolloid process in 2020. In January 2022 the Company initiated steps to register its hydrocolloid patent in the European common market and in additional foreign countries where we intend to commercialize any future HemoStypo gel formats. We can give no assurance that foreign registration of our patents will be granted in any of these jurisdictions.

The Company has registered trademarks for the following product formats:

Results of Operations for the three months ending June 30, 2023 and 2022

The following table sets forth a summary of certain key financial information for the three months ended June 30, 2023 and 2022:

Three Months ended June 30, 2023 versus Three Months ended June 30, 2022

During the three months ended June 30, 2023 and 2022, the Company had $0 of revenues. The Company did not generate any revenues due to the continued focus of the Company’s capital and resources towards obtaining a Class III PMA.

Total operating expenses for the three months ended June 30, 2023 and 2022 were $475,456 and $754,797, respectively.

The decrease in operating expenses was primarily due to the Company having issued 625,000 shares of common stock for services with a fair value of $300,000 during the three months ended June 30, 2022 compared to $0 during the three months ended June 30, 2023.  

Other income (expense) for the three months ended June 30, 2023 and 2022 was $(47,455) and $(124,240), respectively. The decrease in other expense was due to a decrease in loss on settlement of debt of $92,906 offset by an increase in total interest expense of $16,121. The increase in interest expense was primarily due to the Company having a larger outstanding balance of interest bearing promissory notes along with $8,873 of debt discount amortization expense during the three months ended June 30, 2023 compared to $0 during the three months June 30, 2022.

The decrease in the loss on debt settlement was due to the Company issuing common stock with a fair value of $176,344 for the settlement of an aggregate of $156,750 of accrued liabilities and accrued liabilities – related parties resulting in loss on settlement of debt of $19,594 during the three months ended June 30, 2023 compared to the Company issuing common stock with a fair value of $300,000 for the settlement of an aggregate of $187,500 of accrued liabilities and accrued liabilities – related parties resulting in a loss on settlement of debt of $112,500 during the three months ended June 30, 2022.

Our net loss for the three months ended June 30, 2023 was $522,911 as compared to net loss of $879,037 for the comparable period of the prior year. The decrease in the net loss is due to the Company having a decrease in operating expenses of $279,341 and a decrease in other expenses of $76,785, as explained above.

Results of Operations for the six months ending June 30, 2023 and 2022

The following table sets forth a summary of certain key financial information for the six months ended June 30, 2023 and 2022:

Six Months ended June 30, 2023 versus Six Months ended June 30, 2022

During the six months ended June 30, 2023 and 2022, the Company had $0 of revenues. The Company did not generate any revenues due to the continued focus of the Company’s capital and resources towards obtaining a Class III PMA.

Total operating expenses for the six months ended June 30, 2023 and 2022 were $1,529,431 and $1,709,298, respectively.

The decrease in operating expenses was due primarily to the Company having $0 in stock-based compensation expenses during the six months ended June 30, 2023 compared to $310,200 of stock-based compensation during the six months ended June 30, 2022 offset by an increase in rent expense of $12,850, an increase of $12,500 in litigation settlement expenses ($462,500 and $450,000 for the six months ended June 30, 2023 and 2022, respectively) and an increase of $123,823 in research and development expenses from $323,789 in the six months ended June 30, 2023 compared to $199,966 in the six months ended June 30, 2022. 

The decrease in stock-based compensation was due to the Company having $0 stock-based compensation expense during the six months ended June 30, 2023 compared to the Company having issued 645,000 shares of common stock for services valued at $310,200 during the six months ended June 30, 2022.

Other income (expense) for the six months ended June 30, 2023 and 2022 was $(136,186) and $(134,003), respectively. The increase in other expense was due to an increase in total interest expense of $35,026 offset by a decrease in loss on debt settlement of $32,843 during the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase in interest expense was primarily due to the Company having a larger outstanding balance of interest bearing promissory notes along with $17,648 of debt discount amortization expense during the six months ended June 30, 2023 compared to $0 during the six months June 30, 2022.

The decrease in the loss on settlement of debt was due to the Company issuing common stock with a fair value of $424,782 for the settlement of an aggregate of $344,250 of accrued liabilities and accrued liabilities – related party during the six months ended June 30, 2023 compared to the Company issuing common stock with a fair value of $304,001 for the settlement of an aggregate of $190,626 of accrued liabilities and accrued liabilities – related parties during the six months ended June 30, 2022.

Our net loss for the six months ended June 30, 2023 was $1,665,617 as compared to net loss of $1,843,301 for the comparable period of the prior year. The decrease in the net loss was due to the Company having a decrease in operating expenses of $179,867 offset by an increase in other expenses from $134,003 during the six months ended June 30, 2022 to $136,186 for the six months ended June 30, 2023 as explained above.

Financial Condition, Liquidity and Capital Resources

As of June 30, 2023, the Company had a negative working capital of $1,994,204. The Company has not yet attained a level of operations which will allow it to meet its current overhead expense obligations. The report of our independent registered public accounting firm on our 2022 financial statements includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The Company has been focusing its capital and resources towards seeking a Class III PMA for its HemoStyp technology, and has funded its initial operations with private placements, and unsecured loans from related parties. There can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company. Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things, our ability to achieve our business goals and objectives, as well as improvement in the economic climate.

During 2022, the Company entered into a common stock purchase agreement (“CSPA”) with White Lion, which gives the Company the right, but not the obligation, to require White Lion to purchase up to $10,000,000 of the Company’s common stock, subject to certain limitations and conditions set forth in the CSPA. As of the date of this filing, the Company has received approximately $1,535,794 in proceeds from White Lion to pay for its operations and finalization of its Class III PMA application. The sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, economic conditions and actions by policymaking bodies are contributing to rising interest rates and significant capital market volatility, which, along with increases in our borrowing levels, could increase our future borrowing costs.

Cash Flows

The Company’s cash on hand at June 30, 2023 and December 31, 2022 was $133,601 and $13,377, respectively.

The following table summarizes selected items from our statements of cash flows for the six months ended June 30, 2023 and 2022:

Net Cash Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 2023 was $1,019,370. The Company had net loss of $1,665,617 offset by amortization expense of $2,025, amortization of debt discount of $17,648, stock issued for litigation settlement of $462,500 and a loss on debt settlement of $80,532, a decrease in inventory of $1,132, a decrease in prepaid and other current assets of $15,369 and an increase in accrued liabilities - related party of $229,711.  The Company also had a decrease in accounts payable and accrued expenses of $12,670 and a decrease in accrued litigation settlement of $150,000.

Net cash used in operating activities for the six months ended June 30, 2022 was $399,189. The Company had net loss of $1,843,301 offset by stock for services and compensation of $310,200, amortization expense of $2,025, a loss on debt settlement of $113,375, an increase in accounts payable and accrued expenses of $500,774, an increase in accrued liabilities - related party of $146,944 and an increase in accrued litigation settlement of $380,000 and an increase in prepaid and other current assets of $9,206.

Net Cash Used in Investing Activities

The Company paid $2,850 related to a security deposit during the six months ended June 30, 2023.

The Company paid $40,500 related to the patent application fees during the six months ended June 30, 2022.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2023 was $1,142,444. This was due to the result of the Company receiving $1,151,580 in proceeds from the sale of stock offset by making payments of $9,136 on a loan payable.

Net cash provided by financing activities for the six months ended June 30, 2022 was $424,306. This was due to the result of the Company receiving $77,292 in proceeds from the sale of stock and receiving $383,275 from related party loans offset by making payments of $36,261 on loan payable.

Off-Balance Sheet Arrangements

As of June 30, 2023, we have no off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses in the financial statements and accompanying notes. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. Based on this definition, we have the critical accounting estimates identified below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results which are found in Note 2 – Significant Accounting Policies of our 2022 Annual Report on Form 10-K and Note 2 – Significant Accounting Policies in the accompanying financial statements. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation expense for employees and non-employees is measured at the grant date fair value. Stock-based compensation for all stock-based awards to employees and directors is recognized as an expense over the requisite service period, which is generally the vesting period.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company is in the process of implementing disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports are recorded, processed, summarized, and reported within the time periods specified in rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer and Principal Financial Officer to allow timely decisions regarding required disclosure.

As of June 30, 2023, the Chief Executive Officer and the Principal Financial Officer carried out an assessment of the effectiveness of the design and operation of our disclosure controls and procedures and concluded that the Company’s disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting

During the six months ended June 30, 2023, there were no changes in our system of internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Management does not believe there have been any material changes to the risk factors listed in Part I, “Item 1A, Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2022. These risk factors should be carefully considered with the information provided elsewhere in this report, which could materially adversely affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following summarizes all sales of our unregistered securities from January 1, 2023 through June 30, 2023. The securities in the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(a)(2), 4(a)(6) and/or 3(b) of the Securities Act and on Regulation D promulgated under the Securities Act, and in reliance on similar exemptions under applicable state laws as transactions not involving a public offering. No placement or underwriting fees were paid in connection with these transactions. All cash proceeds from the sale of securities were used for working capital purposes.